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Arbitration Clauses in CEO Employment Contracts: An Empirical and Theoretical Analysis

Posted by on Monday, May 31, 2010 in Articles, Volume 63, Number 4, Volumes.

A bill currently pending in Congress would render unenforceable mandatory arbitration clauses in all employment contracts. Some perceive these provisions as employer efforts to deprive employees of important legal rights. Company CEOs are firm employees, and, unlike most other firm employees, they can actually negotiate their employment contracts, very often with attorney assistance. Moreover, many CEO employment contracts are publicly available, so they can be examined empirically. In this paper, we ask whether CEOs bargain to include binding arbitration provisions in their employment contracts. After exploring the theoretical arguments for and against including such provisions in these agreements, we use a large sample of CEO employment contracts to test the several different hypotheses for including such provisions. We find that only about one half of CEO employment contracts in our sample include such provisions. What factors might determine whether CEOs agree to arbitrate their employment disputes with their companies? We find that CEOs that receive a higher percentage of long-term incentive pay as a fraction of their total pay, that work in industry sectors that are undergoing greater amounts of change, and that have lower long-term profitability are statistically significantly more likely to have arbitration provisions in their employment contracts. The importance of contextual factors for arbitration clauses in CEO contracts indicates that regulation of arbitration clauses in employment contracts should be more nuanced than that found in pending legislation.